Collections in securitised pools of vehicle loan receivables rated by CRISIL saw a V-shaped recovery in January 2017 collections (payouts made in February 2017), rebounding to ~95% from ~85% in November, and virtually shrugging off demonetisation. On the other hand, pools backed by microfinance (MFI) receivables are under stress and being closely monitored, while those backed by home loans have remained unaffected.
Demonetisation had hampered collections for most non-bank lenders in November and December 2016. Borrowers had also preferred to use cash for personal and business needs, rather than to service debt in those two months.
Says Krishnan Sitaraman, Senior Director, CRISIL Ratings: “Most financiers quickly reoriented their collection strategy after demonetisation, such as focussing on educating borrowers on the benefits of using bank facilities, and reworking their collection cycles by spacing it out across the month. The collection trends in January are encouraging and seem to indicate that the impact of demonetisation has by and large played out in the vehicle financing space.”
Tractor pools, where loan repayments are based on the half-yearly crop cycle, were the worst hit in November. The demonetisation announcement coincided with the sale of kharif crop by farmers, which is typically the collection period. Such sales are cash-based, and shortage of currency meant farmers faced challenges in offloading their harvest.
However, on the back of improvement in currency availability later, and recovery in agriculture trade, tractor collections rebounded significantly to ~100% in January from ~ 70% in November.
The housing loan segment remained unaffected, with collection efficiency stable ~99%, because of minimal reliance on cash collections. The standard payment mode in this segment is post-dated cheque or electronic clearing service.
In the loan against property (LAP) segment, CRISIL noted some volatility in collections, which is reflective of lumpiness in cash flows typically seen in the self-employed segment. However, no material dip was seen compared with a business-as-usual scenario.
The impact of demonetisation was more pronounced in the microfinance segment because of its cash-intensive nature of transactions. The modest collection performance was initially attributable to cash crunch after demonetisation and local socio-political issues on the eve of assembly elections. Overall collections have dropped in November and December 2016 especially in Uttar Pradesh and certain districts of Maharashtra.
Now, fresh challenges have emerged in Karnataka and parts of Tamil Nadu. CRISIL understands that the collection challenges in recent months were fuelled by news of loan waivers and originator-specific issues. While collection ratios in January 2017 have rebounded, they range from 60% to 95% for different States and remain well below pre-demonetisation levels of ~99%. Additionally, there is also a divergence between different originators within States. Most of CRISIL rated MFI pools are structured such that investors are promised only
interest payments on a timely basis, while the principal is paid by the end of the transaction. For such transactions, called timely interest and ultimate principal (TIUP) structures, there is additional time for recovery from overdues.
CRISIL continues to closely monitor all pools; improvement in collection efficiency by April 2017 will remain a key rating sensitivity factor.
Says Ajit Velonie, Director, CRISIL Ratings, “At an overall level, it is critical for financiers across asset classes to stay focused on recoveries and arrest large slippages from the 1-30 delinquency bucket, despite the Reserve Bank of India offering temporary relief on asset classification.”